Monday, February 18

The Importance of a Car Emergency Fund

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A Car Emergency Fund is savings set aside specifically for any unexpected event related to owning a vehicle. Since it’s more likely than not owning a car will come with a few surprise expenses, having a Car Emergency Fund is essential to good personal financial management!

Why you need a car emergency fund

No matter how great of a driver you are or how reliable your vehicle is, you will inevitably eventually have to spend money fixing, maintaining, and owning your vehicle. Unlike a life emergency like an unexpected layoff or medical diagnoses, the chance of something happening to your vehicle is approximately 100%. For example:

  • You will have speeding tickets, parking tickets, and other miscellaneous costs
  • Your car will need unexpected maintenance and repairs
  • Your car will inevitably get scratched or dinged — and you might not want to go through insurance to fix it

As someone that has already hit one of those three points listed above in only 6 months of car ownership, I can attest to the value of having money set aside specifically for things that suck to pay for.

You can use your Car Emergency Fund to make car payments in the event of an emergency

It’s important to have an Emergency Fund to deal with the unexpected in life. Most experts suggest tucking away 3-6 months of essential expenses to protect you in the event of a layoff or disability. It can take years to amass that type of savings, and then if an emergency does happen, you’ll burn through it pretty fast. A designated car emergency fund can further protect you in this instance.

RELATED: The $20 Emergency Fund

In the event that you cannot work for a period of time, you can use your car emergency fund to make car payments. Assuming a bi-weekly car payment of $100, even a car emergency fund of as little as $1,000 can cover 10 car payments! That’s approximately 5 months worth.

Using your car emergency fund to cover car payments in the event of an emergency will free up dollars in your regular emergency fund for other expenses. Imagine you did find yourself without an income. Knowing you can make car payments for 5+ months while you look for another job means you don’t have to add the stress of trying to decide whether or not to sell your car to an already precarious financial situation.

You can use your Car Emergency Fund to pay off your car loan

While many personal finance experts will insist you pay cash for any vehicle you purchase, for many people this isn’t possible and they need to finance. On the bright side, over the years that you own your vehicle, if you diligently stash a few dollars in your car emergency fund while you pay off your car loan, you’ll eventually get to the point where you have more money saved than you owe on your vehicle.

Once you hit this milestone, you have two options:

  1. continue making regular payments on your car loan until it’s paid off in full
  2. withdraw the amount in your car emergency fund to pay off the loan and get out of debt right now

But won’t I still have a car that needs an emergency fund if I use that money to pay off the loan? Yes — but now you’ll also not have to make a car payment every month which gives you more wiggle room in your budget and the opportunity to rebuild your car emergency fund quickly.

Choosing to use savings or debt repayment is not always an easy decision, so do what feels right for you.

How to save a Car Emergency Fund

Saving a car emergency fund takes the same strategy as saving for anything else:

  1. Set a savings goal
  2. Determine your timeline
  3. Calculate how much you can regularly save
  4. Automate the process

Open a high-interest savings account to earn extra $

I suggest opening a high-interest savings account separate from your regular day-to-day banking for your Car Emergency Fund. I personally use EQ Bank because they pay 2.30% interest. On a $1,000 balance, that works out to $23 per year. On a $2,500 balance, that’s almost $58 of extra cash. The extra money earned through interest makes me feel like my emergency fund is “saving itself”!

Make your first saving target your insurance deductible

If you’re at a loss of how much you need to save in your car emergency fund, your insurance deductible is a great place to start. In the event of an accident, this is the amount of money you’ll have to come up with before insurance steps in and foots the rest of the bill. For me, this amount was $1,000.

Your insurance deductible may be as low as $500, or even $0. If it is currently $0, you might want to consider calling your auto insurance provider and seeing if you can raise your deductible. This typically lowers your insurance premiums, which will give you more money to put into your car emergency fund savings account!

RELATED: Choosing the Right Home & Auto Insurance

Pad your account with a little bit extra

Once I saved my insurance deductible in my Car Emergency Fund, I breathed a sigh of relief knowing that no matter what happened, I was financially ready to deal with the unexpected. However, I decided to save a bit extra just in case multiple things went wrong at once. I set my next savings target to $2,500.

Generally increasing a savings balance is far easier than starting one. Because I already had $1,000 saved, saving more was less urgent so I set my timeline at one year. Because I only needed to save an additional $1,500, I set up an automatic transfer of $30 per week to the account. I started the first week of January and ends a couple of weeks before Christmas.

$30 per week x 50 weeks = $1,500 in savings

With interest earned on the account, I’ll actually slightly surpass my $2,500 savings target. Because I can stop my contributions before Christmas, I’ll also have a little bit of extra spending money for gifts!

Driving safely into the financially secure sunset

Once your Car Emergency Fund is fully funded, you can reallocate the regular savings contribution to something else… like topping up your regular emergency fund! Or something more fun, like a vacation.

Protecting yourself financially in the event of the unexpected can reduce the impact of catastrophe on your life. This gives you peace of mind — which is exactly what you money should be doing for you!

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary, and PhD from the school of life in being a badass. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

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